Proposed Exemptions; McClain's R.V., Inc. 401(k)

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10583, et al.]

Proposed Exemptions; McClain's R.V., Inc. 401(k)

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of Proposed Exemptions.

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SUMMARY: This document contains notices of pendency before the

Department of Labor (the Department) of proposed exemptions from

certain of the prohibited transaction restrictions of the Employee

Retirement Income Security Act of 1974 (the Act) and/or the Internal

Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

All interested persons are invited to submit written comments or

request for a hearing on the pending exemptions, unless otherwise

stated in the Notice of Proposed Exemption, within 45 days from the

date of publication of this Federal Register Notice. Comments and

requests for a hearing should state: (1) the name, address, and

telephone number of the person making the comment or request, and (2)

the nature of the person's interest in the exemption and the manner in

which the person would be adversely affected by the exemption. A

request for a hearing must also state the issues to be addressed and

include a general description of the evidence to be presented at the

hearing.

ADDRESSES: All written comments and request for a hearing (at least

three copies) should be sent to the Pension and Welfare Benefits

Administration, Office of Exemption Determinations, Room N-5649, U.S.

Department of Labor, 200 Constitution Avenue, NW, Washington, DC 20210.

Attention: Application No. ______, stated in each Notice of Proposed

Exemption. The applications for exemption and the comments received

will be available for public inspection in the Public Documents Room of

Pension and Welfare Benefits Administration, U.S. Department of Labor,

Room N-5507, 200 Constitution Avenue, NW, Washington, DC 20210.

Notice to Interested Persons

Notice of the proposed exemptions will be provided to all

interested persons in the manner agreed upon by the applicant and the

Department within 15 days of the date of publication in the Federal

Register. Such notice shall include a copy of the notice of proposed

exemption as published in the Federal Register and shall inform

interested persons of their right to comment and to request a hearing

(where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in

applications filed pursuant to section 408(a) of the Act and/or section

4975(c)(2) of the Code, and in accordance with procedures set forth in

29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).

Effective December 31, 1978, section 102 of Reorganization Plan No. 4

of 1978 (43 FR 47713, October 17, 1978) transferred the authority of

the Secretary of the Treasury to issue exemptions of the type requested

to the Secretary of Labor. Therefore, these notices of proposed

exemption are issued solely by the Department.

The applications contain representations with regard to the

proposed exemptions which are summarized below. Interested persons are

referred to the applications on file with the Department for a complete

statement of the facts and representations.

McClain's R.V., Inc. 401(k) Profit Sharing Plan (the Plan) Located in

Lake Dallas, Texas

[Application No. D-10583]

Proposed Exemption

The Department is considering granting an exemption under the

authority of section 408(a) of the Act and section 4975(c)(2) of the

Code and in accordance with the procedures set forth in 29 CFR part

2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption

is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2)

of the Act and the sanctions resulting from the application of section

4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the

Code, shall not apply to the proposed sale of certain unimproved real

property (the Land) by the Plan to Larry McClain (Mr. McClain), the

sole shareholder of McClain's R.V. Inc., the sponsor of the Plan, and a

party in interest with respect

[[Page 27331]]

to the Plan, provided that the following conditions are satisfied:

(a) the proposed sale will be a one-time cash transaction;

(b) the Plan will receive the greater of: (1) the original

acquisition cost of the Land plus the aggregate holding costs incurred

by the Plan; or (2) the current fair market value of the Land (plus an

appropriate premium related to the adjacency of the Land to other real

property owned by McClain's R.V. Inc.), as established by an

independent qualified appraiser at the time of the sale; and

(c) the Plan will pay no commissions or other expenses associated

with the proposed sale.

Summary of Facts and Representations

1. The Plan is a 401(k) profit sharing plan that was established

effective January 1, 1981. As of December 31, 1996, the Plan had 73

participants and beneficiaries. As of December 31, 1997, the Plan had

total assets of $3,419,103. Chase Texas, N.A. (formerly known as Texas

Commerce Bank) is a directed trustee of the Plan.

The sponsor of the Plan is McClain's R.V. Inc. (the Employer),

which is a subchapter ``C'' corporation, incorporated in the State of

Oklahoma. The Employer sells and services recreational vehicles and

travel trailers. Mr. McClain is the sole shareholder of the Employer

and a Plan participant.

2. On or about November 7, 1985, the Plan purchased the Land from

Mr. Pertells, an independent third party, for approximately $57,000.

This original purchase transaction was made in cash with no extension

of credit involved.

The Land is located at S.W. 2nd Street and Rockwell Avenue in

Oklahoma City, Oklahoma. The Land consists of two tracts which comprise

approximately 21,855 square feet, and is adjacent to certain real

property that is owned by the Employer. The Land has been used

sporadically by the Employer for overflow or customer parking. The

applicant represents that the Employer's customers would occasionally

park on the Land rather than in the Employer's main parking lot. In the

interest of maintaining good customer relations, the Employer did not

require the customers to move their vehicles to the regular parking

area. Additionally, when the Employer's main parking lot was full, the

employees of the Employer would temporarily park their vehicles on the

Land, and would move their vehicles to the Employer's parking lot later

in the day. The applicant represents that the Employer does not require

its employees or customers to pay for parking on the Land or in the

Employer's parking lot.1 As such, there have been no formal

leases or arrangements made between the Plan and the Employer to

compensate the Plan for parking on the Land. Furthermore, the Land has

yielded no other revenue for the Plan from the date of its original

acquisition to the present.2

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\1\ In this regard, the Department notes that section

406(a)(1)(D) of the Act prohibits, in relevant part, a plan

fiduciary from causing a plan to engage in a transaction which

constitutes a direct or indirect transfer to, or use by or for the

benefit of, a party in interest, of any assets of the plan. However,

the Department is not providing any relief herein for any violations

of part 4 of Title I of the Act which may have occurred during the

Plan's ownership of the Land.

\2\ The Department expresses no opinion in this proposed

exemption as to whether the acquisition and the subsequent holding

of the Land by the Plan violated section 404(a) of the Act. Section

404(a) of the Act requires, among other things, that a fiduciary of

a plan must act prudently, solely in the interest of the plan's

participants and beneficiaries, and for the exclusive purpose of

providing benefits to participants and beneficiaries when making

investment decisions on behalf of a plan.

The Department notes further that the decision to propose this

exemption is based on the applicant's representations, as discussed

herein, that any attempts to sell the Land to a third party would

result in further losses to the Plan.

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3. The original decision to purchase the Land as a long term

investment was made by the trustees of the Plan in 1985. The applicant

maintains that at the time the Land was originally purchased, land

values were stable and there was no indication that property values

would plummet shortly thereafter. The trustees also intended to lease

the Land to the Employer for use as necessary, thus providing some

income to the Plan. However, the intended leasing of the Land did not

occur because the trustees were informed that such a lease would

violate the prohibited transaction rules of the Act.

The Plan's estimated aggregate holding costs relating to the Land

for the period 1985-1997 were $3,473.23. This amount includes the

property taxes that were due on the Land for that period, and certain

periodic appraisals of the Land that were paid for by the

Plan.3 Therefore, the Plan's total cost for the acquisition

and holding of the Land was $60,473.23 as of April, 1998.4

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\3\ The applicant represents that the appraisals for the years

1996, 1997 and 1998 have been paid by the Employer.

\4\ This amount represents the sum of the Plan's original

acquisition cost of $57,000 plus the aggregate holding costs of

$3,473.23.

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4. The Land was appraised on January 15, 1998, (the Appraisal) by

Bennie W. Vowell (Mr. Vowell), an independent qualified appraiser

certified in the State of Oklahoma. The Appraisal is an update of an

earlier appraisal of the Land, which was also conducted by Mr. Vowell.

The Appraisal was prepared in accordance with the Uniform Standards of

Professional Appraisal Practice and analyzed appropriate market data

for determining the fair market of the Land, including recent sales of

similar properties as well as the ``highest and best use'' value of the

Land. The Appraisal also considered the adjacency of the Land to real

property owned by the Employer and, accordingly, added a premium to the

value of the Land in any sale to the Employer. The Appraisal concluded

that the fair market value of the Land was $49,000, as of January 15,

1998.

5. Mr. McClain proposes to purchase the Land from the Plan in a

one-time cash transaction. As of December 31, 1997, the Land

represented approximately 1.4 percent of the Plan's total assets. The

applicant represents that the Land has been declining in value since

the original acquisition. This decline in value has been adversely

affecting the value of the participants' accounts in the

Plan.5

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\5\ The applicant represents that a portion of the Land's value

is allocated to each participant's account.

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The applicant represents that the amount Mr. McClain would pay for

the Land in this proposed transaction is in excess of the Land's

current fair market value. If the Land was sold on the open market, it

would not sell for as much as Mr. McClain is willing to pay. In

addition, the Plan's price in a sale of the Land to an independent

third party would not include the adjacency premium, which the

Appraisal indicates is appropriate in a sale to Mr. McClain as a result

of the Employer's ownership of adjacent property. The sale of the Land

to an independent third party at a lower price would cause the Plan and

its participants to suffer a financial loss. Alternatively, if the Land

remains in the Plan, the participants will not be able to invest the

portions of their accounts which are currently attributable to the Land

in other investment vehicles with a higher yield. The applicant thus

maintains that the terms and conditions of the proposed sale are

superior alternatives to selling the Land to a third party or retaining

the Land as a Plan asset.

6. Therefore, the applicant represents that the proposed

transaction is in the best interest and protective of the Plan because

the transaction will enable the Plan to divest of an asset that has

depreciated in value and generated no income to the Plan. The Plan will

be able to reinvest the proceeds in other investments with higher rates

of return. The transaction is protective of the Plan,

[[Page 27332]]

because the Plan will receive the greater of: (a) the total cost of the

Land; or (b) the current fair market value of the Land (plus an

appropriate premium related to the Land's adjacency to the Employer's

property) as established by an independent qualified appraiser at the

time of the sale. The Plan will not pay any commissions or other

expenses associated with the sale. Furthermore, the applicant

represents that any amounts received by the Plan as a result of the

proposed transaction, which are in excess of the fair market value of

the Land will be treated as a contribution to the Plan, but that this

contribution will not exceed limitations of section 415 of the Internal

Revenue Code.

7. In summary, the applicant represents that the transaction

satisfies the statutory criteria of section 408(a) of the Act and

section 4975(c)(2) of the Code because:

(a) the proposed sale will be a one-time cash transaction;

(b) the Plan will receive the greater of: (i) the total cost of the

Land; or (ii) the current fair market value of the Land (plus an

appropriate premium related to the Land's adjacency to the Employer's

property) as established by an independent qualified appraiser at the

time of the sale;

(c) the Plan will not pay any commissions or other expenses

associated with the proposed sale; and

(d) the sale of the Land to the Employer will enable the Plan to

divest of an illiquid asset which has depreciated in value and yielded

no income. Also, the sale will enable the Plan to reinvest the sale

proceeds in investments with higher rates of return.

Tax Consequences of Transaction

The Department of the Treasury has determined that if a transaction

between a qualified employee benefit plan and its sponsoring employer

(or an affiliate thereof) results in the plan either paying less or

receiving more than fair market value, such excess may be considered to

be a contribution by the sponsoring employer to the plan, and therefore

must be examined under the applicable provisions of the Internal

Revenue Code, including sections 401(a)(4), 404 and 415.

For Further Information Contact: Ekaterina A. Uzlyan of the

Department at (202) 219-8883. (This is not a toll-free number.)

Karen J. Hartley Profit Sharing Plan (P/S Plan) and Karen J. Hartley

Money Purchase Pension Plan and Trust Agreement (M/P Plan,

Collectively; the Plans) Located in Eugene, Oregon

[Application Nos. D-10588 and D-10589]

Proposed Exemption

The Department is considering granting an exemption under the

authority of section 4975(c)(2) of the Code and in accordance with the

procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,

32847, August 10, 1990.) If the exemption is granted, the sanctions

resulting from the application of section 4975 of the Code, by reason

of section 4975(c)(1)(A) through (E) of the Code, shall not apply to

the proposed loan (the Loan) by the Plans to Karen J. Hartley (Ms.

Hartley), the trustee and sole participant of the Plans and, a

disqualified person with respect to the Plans; 6 provided

that the following conditions will be met:

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\6\ Pursuant to CFR 2510.3-3(b) and (c), the Department has no

jurisdiction with respect to the Plans under Title I of the Act.

However, there is jurisdiction under Title II of the Act pursuant to

section 4975 of the Code.

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1. The Loan will be structured such that each Plan will lend up to

25% of its assets. However, the aggregate amount of the Loan will not

exceed $40,000 at any time;

2. The outstanding balance of the Loan will at no time exceed 25%

of the Plans' aggregate assets;

3. The Plans will bear no expenses with respect to the proposed

transaction;

4. The terms and conditions of the Loan will be at least as

favorable to the Plans as those obtainable in arm's-length transaction

with an unrelated party; and

5. The Loan will be adequately secured by collateral, which at all

times will be equal to 100% of the outstanding principal amount of the

Loan plus 6 months interest at the Loan's interest rate of 8.2%. In the

event the collateral amount falls below this required amount, this

proposed exemption, if granted, will no longer be available.

Summary of Facts and Representations

1. The P/S Plan was established on January 1, 1989, and the M/P

Plan was adopted on January 1, 1993. Ms. Hartley is the sole

participant 7 and trustee of both Plans. Ms. Hartley has

investment discretion over the Plans' assets. Charles Schwab and

Company (Schwab) is the current custodian of the Plans. As of January

31, 1998, the P/S Plan had total assets of $142,171.59, and the M/P

Plan had total assets of $35,031.71. Thus, as of January 31, 1998, the

aggregate balance of the Plans' assets was $177,203.30. Ms. Hartley is

a sole proprietor engaged in the practice of law in Eugene, Oregon.

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\7\ The applicant represents that each of the Plans will have no

other participants during the Loan's existence, from its initial

making until the outstanding principal balance has been paid in

full, and the Loan is terminated.

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2. The Loan will have a ten year duration and a fixed interest rate

of 8.2% per annum. The Loan will be payable in equal monthly

installments of principal and interest. The promissory note (the Note)

which will evidence the Loan provides for no penalty, premium or

prepayment charge in the event of a full or partial prepayment. The

Loan will be structured such that each Plan will lend up to 25% of its

assets. However, the aggregate amount of the Loan will at no time

exceed $40,000. Furthermore, the outstanding principal balance of the

Loan will at no time exceed 25% of the Plans' aggregate assets.

Ms. Hartley represents that the terms of the Loan will comply with

section 72(p) of the Code.8 The Loan proceeds will be used

by Ms. Hartley to acquire a dwelling unit, which shall be her principal

residence.

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\8\ In this regard, section 72(p)(1) of the Code treats a loan

from a qualified plan to a participant as a ``premature

distribution'' unless the loan meets certain conditions to qualify

for ``exception for certain loans'' contained in section 72(p)(2) of

the Code. However, with respect to the Loan, the Department has no

jurisdiction to determine whether the requirements of section 72(p)

of the Code are met.

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3. The Loan will be secured by cash or cash equivalents, such as

money market funds and/or certificates of deposit (the Collateral). The

Collateral amount will at all times equal 100% of the outstanding

principal amount of the Loan, plus 6 months of interest on such

principal at the rate of 8.2% per annum. The Collateral will be

maintained in a separate account with Schwab (the Collateral Account).

The applicant represents that at no time will the Collateral Account

contain less than the amount of assets required to fully secure the

Loan, in accordance with this proposed exemption. In the event that the

amount in the Collateral Account falls below the required amount, as

specified herein, the proposed exemption, if granted, will no longer be

available.

A security agreement (Security Agreement) will be signed by the

parties to create a perfected security interest for the Plans in the

Collateral. Ms. Hartley will perfect the Plans' security interest by a

proper filing of a state financing statement with the Corporation

Division

[[Page 27333]]

of the State of Oregon. Ms. Hartley will retain rights to and

possession of the Collateral, subject to the terms of the Security

Agreement and the rights and obligations of Schwab, through its

maintenance of the Collateral Account.

4. Ms. Hartley will monitor the Collateral. On a monthly basis, Ms.

Hartley will receive from Schwab a statement for the Collateral Account

(Schwab Statement). Ms. Hartley will determine if the amount in the

Collateral Account contains at least the required Collateral amount.

On an annual basis, Ms. Hartley will examine the Schwab Statements

for the Collateral Account, and will determine whether the amount in

the Collateral Account exceeds the required amount of the Collateral.

This determination may be made using monthly interest amortization

tables, or a computer program. If the Collateral Account exceeds the

required Collateral amount (an Excess Amount), Ms. Hartley may transfer

the Excess Amount to her personal account, as long as the required

Collateral amount remains in the Collateral Account. Alternatively, Ms.

Hartley may leave any portion of the Excess Amount in the Collateral

Account. However, any Excess Amount in the Collateral Account shall not

modify the required Collateral amount.

If the Loan is ever in default, Ms. Hartley as trustee for the

Plans will seek to remedy the default and use all legal means available

in the State of Oregon.

5. With respect to the rights of the Plans as a secured creditor,

the Security Agreement contains the following provisions. Section 4.2

of the Security Agreement states that the Debtor (i.e., Ms. Hartley)

shall not remove the Collateral from the Collateral Account without the

written consent of the Secured Party (i.e., the Plans). Section 4.3 of

the Security Agreement also states that the Debtor agrees to execute

and file a financing statement and do whatever may be necessary under

the applicable provisions contained in the Uniform Commercial Code for

the State of Oregon to perfect and continue the Secured Party's

interest in the Collateral. Section 4.4 of the Security Agreement

provides that the Debtor will not sell or otherwise transfer or dispose

of any interest in the Collateral without the prior written consent of

the Secured Party. Furthermore, Section 4.5 of the Security Agreement

provides that, among other things, except where it has received the

prior written consent of the Secured Party, the Debtor shall keep the

Collateral free from any adverse liens or other security interests. The

Debtor will not use or permit anyone to use the Collateral in violation

of any statute, ordinance, or state or federal regulation, and the

Secured Party may examine and inspect the Collateral at any time.

6. Ms. Hartley desires to enter into the loan transaction because

the transaction is administratively feasible, protective and in the

best interest of the Plans. The Plans will bear no expenses with

respect to the proposed transaction. The Loan will not exceed 25% of

each of the Plan's total net assets, and the aggregate amount of the

Loan will not exceed $40,000. In addition, the outstanding balance of

the Loan will at no time exceed 25% of the Plans' aggregate assets. The

Loan will be adequately secured by the Collateral, which at all times

will be equal to 100% of the outstanding principal amount of the Loan

plus 6 months interest. Also, Ms. Hartley represents that the Loan is

consistent with the Plans' liquidity needs and investment objectives,

including the Plans' overall investment strategy to invest only in so-

called ``socially responsible investments''.9

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\9\ The Department is providing no opinion in this proposed

exemption as to whether particular investments or investment

strategies would be considered ``socially responsible'' in nature.

In this regard, the Department notes that the Internal Revenue

Service (IRS) has taken the view that investment strategies for

qualified retirement plans may raise questions with regard to the

exclusive benefit rule under section 401(a) of the Code if, among

other things, the safeguards and diversity that a prudent investor

would adhere to are not present. [See, for example, IRS Rev. Rul.

73-532, 1973-2 C.B. 128]

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With respect to the terms and conditions of the Loan, Washington

Mutual Bank in Eugene, Oregon (the Bank), in a letter dated April 2,

1998, has certified that it would enter into a similar loan with Ms.

Hartley (the Bank Loan). Specifically, the original amount of the Bank

loan would be $40,000. The Bank Loan would be payable in equal monthly

payments of principal and interest, in the same amount as the Loan,

over a 10 year period at an interest rate of 8.2%. Therefore, Ms.

Hartley represents that the terms of the Loan will be at least as

favorable to the Plans as those obtainable in arm's-length transaction

with an unrelated party, as indicated by the letter from the Bank.

7. In summary, the applicant represents that the transaction

satisfies the statutory criteria of section 4975(c)(2) of the Code

because:

A. The Plans will bear no expenses with respect to the proposed

transaction;

B. The Loan will not exceed 25% of each of the Plan's total net

assets. In addition, the aggregate amount of the Loan will not exceed

$40,000;

C. The outstanding principal balance of the Loan will at no time

exceed 25% of the Plans' aggregate assets;

D. The terms and conditions of the Loan will be at least as

favorable to the Plans as those obtainable in arm's-length transaction

with an unrelated party;

E. The Loan will be adequately secured by the Collateral, which at

all times will be equal to 100% of the principal amount of the Loan

plus 6 months interest at the Loan's interest rate of 8.2%. In the

event the Collateral Amount falls below this required amount, the

proposed exemption, if granted, will no longer be available; and

F. Ms. Hartley is the sole participant of the Plans and she desires

that this transaction be consummated.

Notice to Interested Persons

Because Ms. Hartley is the sole participant of the Plans, it has

been determined that there is no need to distribute the notice of

proposed exemption to interested persons. Comments and requests for a

hearing are due thirty (30) days from the date of publication of this

notice in the Federal Register.

For Further Information Contact: Ekaterina A. Uzlyan of the

Department at (202) 219-8883. (This is not a toll-free number.)

General Information

The attention of interested persons is directed to the following:

(1) The fact that a transaction is the subject of an exemption

under section 408(a) of the Act and/or section 4975(c)(2) of the Code

does not relieve a fiduciary or other party in interest of disqualified

person from certain other provisions of the Act and/or the Code,

including any prohibited transaction provisions to which the exemption

does not apply and the general fiduciary responsibility provisions of

section 404 of the Act, which among other things require a fiduciary to

discharge his duties respecting the plan solely in the interest of the

participants and beneficiaries of the plan and in a prudent fashion in

accordance with section 404(a)(1)(b) of the act; nor does it affect the

requirement of section 401(a) of the Code that the plan must operate

for the exclusive benefit of the employees of the employer maintaining

the plan and their beneficiaries;

(2) Before an exemption may be granted under section 408(a) of the

Act and/or section 4975(c)(2) of the Code, the Department must find

that the exemption is administratively feasible, in the interests of

the plan and of its participants and beneficiaries and

[[Page 27334]]

protective of the rights of participants and beneficiaries of the plan;

(3) The proposed exemptions, if granted, will be supplemental to,

and not in derogation of, any other provisions of the Act and/or the

Code, including statutory or administrative exemptions and transitional

rules. Furthermore, the fact that a transaction is subject to an

administrative or statutory exemption is not dispositive of whether the

transaction is in fact a prohibited transaction; and

(4) The proposed exemptions, if granted, will be subject to the

express condition that the material facts and representations contained

in each application are true and complete, and that each application

accurately describes all material terms of the transaction which is the

subject of the exemption.

Signed at Washington, DC, this 13th day of May, 1998.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, Department of Labor.

[FR Doc. 98-13145 Filed 5-15-98; 8:45 am]

BILLING CODE 4510-29-P